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Australia interest rates to go lower, for longer
Topic Started: 5 Aug 2013, 07:13 PM (9,976 Views)
peter fraser
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Australia interest rates to go lower, for longer
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SYDNEY: As Australia contemplates life on the other side of the mining boom, the onus is very much on the country's central bank to prop up the economy by taking interest rates to historic lows and likely keep them there for a long time to come.

The Reserve Bank of Australia (RBA) holds its August policy meeting on Tuesday and is considered almost certain to cut rates a quarter point to 2.5 per cent, bringing this easing cycle to 225 basis points spread over 21 months.

Market rates have already baked in another move to 2.25 per cent by Christmas and there's no hint of a tightening priced in for at least the next two years.

"2014 will be a long year for the economy and a cash rate even lower than our 2.25 per cent forecast is now a distinct possibility," said Alan Oster, group chief economist at National Australia Bank.

That outlook has been clearly reflected in government bond yields, with the cost of borrowing out for one year hitting an all-time low of 2.24 per cent on Monday. Even two- three- and four-year yields are under the cash rate.

In large part, Australia is a victim of its own good fortune. Its embarrassment of natural resources were just what China needed to fuel its growth miracle leading to a truly massive boom in mining.

As a result, mining investment has quadrupled as a share of the economy but now looks to have peaked. Having risen so rapidly the risk is that spending could fall quite sharply from quarter to quarter, taking chunks out of economic growth.

It is even possible that it could cause two consecutive quarters of contraction, the technical definition of recession, something Australia has not suffered for more than 20 years.

That danger may have been on the mind of RBA Governor Glenn Stevens last week when he noted that mining spending could be in for "quite a big fall" in coming months.

He has been seeking to enliven the rest of the economy with lower borrowing costs but consumers and business have been slow to respond. Households favour saving over borrowing, while business confidence is low and political uncertainty high ahead of a federal election next month.

The government is in no position to provide fiscal stimulus, having slashed its revenue projections by A$33 billion over four years to reflect slower growth in nominal gross domestic product (GDP).

Not that bad

Still, Australia's outlook is far from awful compared to its rich-world peers.

A Reuters poll of analysts taken just last month found they expected the country's A$1.5 trillion ($1.3 trillion) of GDP to grow 2.5 per cent this year and 2.8 per cent next. While subpar for Australia, that would be brisk for the developed world.

Helping is a ramp-up in resource exports as all the billions of dollars of investment in capacity comes on line. Indeed, this is really the third stage of the mining boom and will run for years yet. Exports of liquefied natural gas, for instance, should more than quadruple by 2016/17.

Another positive for the economy has been a sharp fall in the stubbornly high Australian dollar. A drop of over 15 per cent since April has eased competitive pressures and delivered a profit windfall to commodity exporters whose products are priced in US dollars.

Analysts estimate every US cent it falls adds around A$100 million to the bottom line for BHP Billiton.

Crucially inflation remains benign, providing the RBA with plenty of room to ease as needed. Inflation ran at 2.4 per cent last quarter, well within the RBA's long-term target band of 2 to 3 per cent. With unemployment rising and labour costs subdued, most analysts see inflation staying there for all of 2014.

That is a major departure from previous experience for Australia, as almost every other mining boom has ended with runaway inflation which necessitated a severe tightening in policy and led inexorably to recession.

It also means this easing cycle could be a lengthy one.

"We expect a cut in August and a further easing next quarter to see the cash rate trough at 2.25 per cent throughout 2014," said Su-Lin Ong, head of economics at RBS Capital Markets, adding that this was a bullish mix for bonds.

"We think the increasing focus on the challenges facing the domestic economy should keep front-end yields well anchored as the lower-for-longer theme garners more traction."
Any expressed market opinion is my own and is not to be taken as financial advice
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herbie
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Low interest rates sound like low returns on just about every asset class I can think of?
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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genX
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herbie
5 Aug 2013, 07:40 PM
Low interest rates sound like low returns on just about every asset class I can think of?
No, low interest rates mean price rises for any financial asset that is leveraged. i.e. equity & housing, the trick is to get out before the bubble pops, like it is about to do in the US (the smart money has been exiting US equity markets for 3 months now, while the dumb money piles in).
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Poontang
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I think the RBA rate won't matter soon and fixed loan rates will probably start to rise towards year end or into the new year.
There are some people who seem angry and continuously look for conflict.
Walk away, the battle they are fighting isn't with you, it's with themselves.

The first lesson of economics is scarcity: There is not enough of anything to satisfy all who want it.
The first lesson of politics is to disregard the first lesson of economics. ~ Thomas Sowell.

Who was the fool, who the wise man, who the beggar or the Emperor? Whether rich or poor, all are equal in death.
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mel
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genX
5 Aug 2013, 07:51 PM
low interest rates mean price rises for any financial asset that is leveraged
good call - this is the type of thing that absolutely matters in the medium term
APF - a place where serious people don't take themselves too seriously. There's nothing else like it.
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peter fraser
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genX
5 Aug 2013, 07:51 PM
No, low interest rates mean price rises for any financial asset that is leveraged. i.e. equity & housing, the trick is to get out before the bubble pops, like it is about to do in the US (the smart money has been exiting US equity markets for 3 months now, while the dumb money piles in).
I'm not sure that I agree with that in relation to housing, but certainly if there is going to be a shift in the trend then it's the early entrants that have the ability to make profits.

In regard to shares then whilst all boats may rise equally, they won't all fall equally when the interest rates start to rise. If the writer is correct, then there is some time between now and then.

NB - I don't own any shares at present.
Any expressed market opinion is my own and is not to be taken as financial advice
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mel
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Poontang
5 Aug 2013, 07:56 PM
I think the RBA rate won't matter soon and fixed loan rates will probably start to rise towards year end or into the new year.
Poons Ill bet you 2 jpegs of attractive women plus the video clip of your choice it doesn't work out that way :lol
Edited by mel, 5 Aug 2013, 08:16 PM.
APF - a place where serious people don't take themselves too seriously. There's nothing else like it.
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Mike
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genX
5 Aug 2013, 07:51 PM
No, low interest rates mean price rises for any financial asset that is leveraged. i.e. equity & housing, the trick is to get out before the bubble pops, like it is about to do in the US (the smart money has been exiting US equity markets for 3 months now, while the dumb money piles in).
That is not true. A house which is owned (no debt) still increases in value if prices are rising. Lower rates help to increase demand which can affect house prices of those with no debt. Lower rates do not discern from people with debt or no debt if the price rises or declines. Price rises due to interest rates are not restricted to mortgage only properties.
http://mike-globaleconomy.blogspot.com.au/
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genX
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peter fraser
5 Aug 2013, 08:01 PM
I'm not sure that I agree with that in relation to housing, but certainly if there is going to be a shift in the trend then it's the early entrants that have the ability to make profits.

Why would it be different for housing? Housing is illiquid, so the effect is not immediate (3-6 months), but leveraged investment is leveraged investment, regardless of the asset class.
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In regard to shares then whilst all boats may rise equally, they won't all fall equally when the interest rates start to rise. If the writer is correct, then there is some time between now and then.
True in the old economy, but not in the new economy. In the new economy, wealth is printed at the central bank, and share prices rise and fall with the flow or not of the money.

Mike
5 Aug 2013, 08:10 PM
That is not true. A house which is owned (no debt) still increases in value if prices are rising. Lower rates help to increase demand which can affect house prices of those with no debt. Lower rates do not discern from people with debt or no debt if the price rises or declines. Price rises due to interest rates are not restricted to mortgage only properties.
Mike, stick to whatever it is you do, building or whatever. Investors are like banks, their profit is the difference between the sale price and the purchase price plus the cost of carry. When the cost of carry goes down, investors chase the yield and as a result bid up prices. It's all a function of leverage.
Edited by genX, 5 Aug 2013, 08:25 PM.
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Poontang
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mel
5 Aug 2013, 08:03 PM
Poons Ill bet you 2 jpegs of attractive women plus the video clip of your choice it doesn't work out that way :lol
Ok, sounds like a fair bet...

Terms of bet? Call ends 2 days after RBA decision 2nd Tuesday April 2014. Fixed rates go up prior to then.. I win They do not, you win.?
There are some people who seem angry and continuously look for conflict.
Walk away, the battle they are fighting isn't with you, it's with themselves.

The first lesson of economics is scarcity: There is not enough of anything to satisfy all who want it.
The first lesson of politics is to disregard the first lesson of economics. ~ Thomas Sowell.

Who was the fool, who the wise man, who the beggar or the Emperor? Whether rich or poor, all are equal in death.
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